The advantages of a line of credit over a credit card (2024)

FAQs

The advantages of a line of credit over a credit card? ›

Your line of credit offers lower interest rates than your high-interest credit card. For example, your line of credit offers an 8% interest rate vs. your credit card's 20%. You have sufficient income to manage your line of credit payments and aren't simply taking on more debt without a repayment plan.

While a business line of credit is similar to a credit card, lines of credit tend to have a higher credit limit and a lower interest rate. They might also be set up so you can make interest-only payments for a set amount of time with your full balance due at the end of its term (also known as a clean-up period).

The LOC is highly flexibility, which is its main advantage. Borrowers can request a certain amount, but they do not have to use it all. Rather, they can tailor their spending from the LOC to their needs and owe interest only on the amount that they draw, not on the entire credit line.

Credit cards tend to be a better choice for smaller purchases, but usually only if you can pay the balance off every month. Unlike lines of credit, you have a grace period (usually 30 days) to pay off your card without incurring interest. Be aware that this grace period extends to purchases only.

Since a line of credit typically offers a larger credit limit and a lower interest rate than credit cards, they are a good choice for larger purchases. In addition, a line of credit offers a flexible option if you don't know exactly how much something is going to cost.

Lines of credit, like any financial product, have advantages and disadvantages, depending on how you use them. On one hand, excessive borrowing against a line of credit can get you into financial trouble. On the other hand, lines of credit can be cost-effective solutions to fund unexpected or major expenses.

Credit cards offer convenience, consumer protections and in some cases rewards or special financing. But they may also tempt you to overspend, charge variable interest rates that are typically higher than you'd pay with a loan, and often have late fees or penalty interest rates.

Pros. Flexibility: You can access funds whenever needed, making it a good option for unexpected expenses. Revolving credit line: The ability to borrow, repay, and borrow again without reapplying can be helpful for ongoing financial needs.

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Lines of credit allow you to borrow funds as needed and only pay interest on the amount used, while loans charge interest on the entire borrowed amount from the start. Repayment terms for lines of credit are often more flexible and can be used to pay for almost anything.

Can you pay bills with a line of credit? ›

You can also pay bills or withdraw cash from your line of credit. If you're interested in discussing how a line of credit can help you achieve your long-term goals, reach out to a CIBC advisor to learn more.

Revolving credit remains open until the lender or borrower closes the account. A line of credit, on the other hand, can have an end date or terms for a time period when you can make payments but not withdrawals.

Like credit cards, a line of credit is considered revolving debt and treated similarly when generating your credit score—if you make your payments in full and on time, it will reflect positively in your credit score. In this article, you will learn: How lines of credit work.

Keeping an unused credit card open can help keep your credit score higher. Keep in mind: Even if you don't use your card often (or at all), it's important to remember that an open credit card account still affects two key credit scoring factors: the length of your credit history and your credit utilization rate.

A line of credit is a type of loan that lets you borrow money up to a pre-set limit. You don't need to use the funds for a specific purpose. You may use as little or as much of the funds as you like, up to a specified maximum. You may pay back the money you owe at any time.

If you don't use a particular credit card, you won't see an impact on your credit score as long as the card stays open. But the consequences to inactive credit card accounts could have an unwanted effect if the bank decides to close your card.

Your loan plus interest gets repaid over an agreed-upon length of time. A line of credit gives you ongoing access to funds that you can use and re-use as needed. You're charged interest only on the amount you use.

Key takeaways: Short term loans offer quick access to cash and may be available to those with poor credit history. Interest rates on a short term loan are typically higher than on long-term loan and could lead to higher total interest paid. Relying on short term loans as revolving credit could lead to a debt spiral.

A loan gives you a lump sum of money that you repay over a period of time. A line of credit lets you borrow money up to a limit, pay it back, and borrow again.

Your credit card also offers robust protection against fraudulent and unauthorised charges. If you report suspicious activity quickly, the bank will reverse the charges, and you won't be liable.